Note 34 - Capital adequacy
The information in this note includes information that is required to be disclosed pursuant to FFFS 2008:25, including applicable amendments, regarding annual reports for credit institutions and FFFS 2014:12, including applicable amendments, concerning supervisory requirements and capital buffers. The information refers to the Hoist Finance AB (publ) consolidated situation (“Hoist Finance”) and Hoist Finance AB (publ), the regulated entity.
The Company’s statutory capital requirements are determined primarily by Regulation (EU) No 575/2013 of the European Parliament and of the Council and the Capital Buffers Act (SFS 2014:966). These laws are aimed at ensuring that the regulated entity and its consolidated situation manages its risks and protects its customers.
The difference between the consolidated accounts and the consolidated situation for capital adequacy purposes is as follows. Joint ventures are consolidated with the equity method in the consolidated accounts, whereas the proportional method is used for the consolidated situation. Securitised assets are recognised in the consolidated accounts but are removed from the accounting records for the consolidated situation. Hoist Finance’s participating interest in the securitised assets is always covered.
There are no existing or anticipated actual or legal obstacles to the immediate transfer of own resources or debt repayment between companies and their subsidiaries.
Additional information on capital adequacy is available in the company’s Pillar 3 report available on www.hoistfinance.com.
Transitional rules, IFRS 9
After obtaining Swedish Financial Supervisory Authority’s approval, Hoist Finance has decided to apply the transitional rules regarding IFRS 9 for the period 30 April 2018 through 31 December 2022. Application of these transitional rules allow the gradual phase-in of expected credit losses to capital adequacy.
Own funds
The table below shows own funds used to cover the capital requirements for Hoist Finance consolidated situation and the regulated entity Hoist Finance AB (publ).
| Hoist Finance consolidated situation | Hoist Finance AB (publ) | |||
| SEK m | 31 Dec 2021 | 31 Dec 2020 | 31 Dec 2021 | 31 Dec 2020 |
| Common Equity Tier 1 (CET1) capital: instruments and reserves | ||||
| Capital instruments and related share premium accounts | 1,913 | 1,913 | 1,913 | 1,913 |
| Retained earnings | 1,993 | 2,044 | 1,039 | 924 |
| Accumulated other comprehensive income and other reserves | -10 | -1 | 694 | 698 |
| Independently reviewed interim profits net of any foreseeable charge or dividend1) | -113 | 50 | -53 | 255 |
| CET1 capital before regulatory adjustments | 3,783 | 4,006 | 3 593 | 3,790 |
| CET1 capital: regulatory adjustments | ||||
| Additional value adjustments | -5 | -7 | -4 | -7 |
| Intangible assets (net of related tax liability) | -292 | -284 | -125 | -113 |
| Deferred tax assets that rely on future profitability | -160 | -93 | -7 | -1 |
| Exposure amount of securitisation positions which qualify for a RW of 1,250 %, where the institution opts for the deduction alternative | -12 | -8 | -12 | -8 |
| Transitional rules regarding IFRS9 | 3 | 3 | 1 | 2 |
| Total regulatory adjustments to CET1 | -466 | -389 | -147 | -127 |
| CET1 capital | 3,317 | 3,617 | 3,446 | 3,663 |
| Additional Tier 1 (AT1) capital: instruments | ||||
| Capital instruments and the related share premium accounts | 1,106 | 1,106 | 1,106 | 1,106 |
| AT1 capital | 1,106 | 1,106 | 1,106 | 1,106 |
| Tier 1 (T1) capital | 4,423 | 4,723 | 4,552 | 4,769 |
| Tier 2 (T2) capital: instruments and provisions | ||||
| Capital instruments and the related share premium accounts | 837 | 821 | 837 | 821 |
| T2 capital | 837 | 821 | 837 | 821 |
| Total capital (TC = T1+ T2) | 5,260 | 5,544 | 5,389 | 5,590 |
1) The Board will propose to the Annual General Meeting not to pay a dividend for the year 2021, as the net result for the year is negative. As a result, no dividend deduction has been included.
As presented in the above table, issued Tier 1 capital instruments and Tier 2 capital instruments are both used in calculating own funds. These instruments are described briefly below.
Additional Tier 1 capital
Additional Tier 1 capital is comprised of three issues of write-down instruments with a nominal amount of EUR 30m, EUR 40m and EUR 40m, respectively, and with coupon rates of 8.625 per cent, 8 per cent and 7.75 per cent, respectively. The convertibles were issued to improve Hoist Finance’s capital structure. The instruments have no scheduled maturity date, although the issuer may redeem the instruments in full at specified dates. The first possible redemption dates are 21 June 2023, 1 September 2023 and 26 February 2025, respectively.
Tier 2 capital instruments
In May 2017 Hoist Finance issued a subordinated loan of EUR 80m, which is included as Tier 2 capital in Hoist Finance’s own funds. The subordinated loan matures on 19 May 2027 with possibility for early redemption after five years and carries a fixed coupon rate of 3.875 per cent. The instrument is listed on the Dublin Stock Exchange.
Revaluation reserve
Hoist Finance’s own funds include a revaluation reserve of SEK 72m in other reserves, of which SEK 64m pertains to a revaluation of shares in subsidiary Hoist Finance UK Ltd during 2013 and SEK 8m pertains to revaluation of acquired loan portfolios.
Capital requirement
The tables below show the risk-weighted exposure amounts and own funds requirements per risk category for Hoist Finance and the regulated entity Hoist Finance AB (publ).
| Hoist Finance consolidated situation | Hoist Finance AB (publ) | |||
| Risk-weighted exposure amounts, SEK m | 31 Dec 2021 | 31 Dec 2020 | 31 Dec 2021 | 31 Dec 2020 |
| Exposures to central governments or central banks | 0 | 0 | 0 | 0 |
| Exposures to regional governments or local authorities | 0 | 0 | 0 | 0 |
| Exposures to institutions | 761 | 670 | 516 | 411 |
| of which, counterparty credit risk | 192 | 72 | 192 | 72 |
| Exposures to corporates | 253 | 462 | 13,341 | 12,594 |
| Retail exposures | 15 | 27 | 12 | 23 |
| Exposures secured by mortgages on immovable property | 324 | 352 | 85 | 83 |
| Exposures in default | 26 431 | 25,012 | 10,316 | 9,258 |
| Exposures in the form of covered bonds | 350 | 408 | 350 | 408 |
| Equity exposures | - | - | 863 | 816 |
| Other items | 382 | 470 | 149 | 164 |
| Credit risk (standardised approach) | 28,516 | 27,401 | 25,632 | 23,757 |
| Securitisation positions in the banking book | 1,741 | 1,954 | 1,741 | 1,954 |
| Market risk (foreign exchange risk – standardised approach) | 0 | 0 | 0 | 0 |
| Operational risk (standardised approach) | 4,272 | 4,208 | 2,326 | 2,213 |
| Credit valuation adjustment (standardised approach) | 181 | 62 | 181 | 62 |
| Total risk-weighted exposure amount | 34,710 | 33,625 | 29,879 | 27,986 |
| Hoist Finance consolidated situation | Hoist Finance AB (publ) | |||
| Capital requirements, SEK m | 31 Dec 2021 | 31 Dec 2020 | 31 Dec 2021 | 31 Dec 2020 |
| Pillar 1 | ||||
| Exposures to central governments or central banks | 0 | 0 | 0 | 0 |
| Exposures to regional governments or local authorities | 0 | 0 | 0 | 0 |
| Exposures to institutions | 61 | 54 | 41 | 33 |
| of which, counterparty credit risk | 6 | 6 | 15 | 6 |
| Exposures to corporates | 20 | 37 | 1,067 | 1,007 |
| Retail exposures | 1 | 2 | 1 | 2 |
| Exposures secured by mortgages on immovable property | 26 | 28 | 7 | 7 |
| Exposures in default | 2,114 | 2,001 | 825 | 741 |
| Exposures in the form of covered bonds | 28 | 33 | 28 | 33 |
| Equity exposures | - | - | 69 | 65 |
| Other items | 31 | 38 | 12 | 13 |
| Credit risk (standardised approach) | 2,881 | 2,193 | 2,051 | 1,901 |
| Securitisation positions in the banking book | 139 | 156 | 139 | 156 |
| Market risk (foreign exchange risk – standardised approach) | 0 | 0 | 0 | 0 |
| Operational risk (standardised approach) | 342 | 337 | 186 | 177 |
| Credit valuation adjustment (standardised approach) | 14 | 5 | 14 | 5 |
| Total own funds requirement – Pillar 1 | 2,777 | 2,691 | 2,390 | 2,239 |
| Pillar 2 | ||||
| Concentration risk | 233 | 234 | 289 | 267 |
| Interest-rate risk in the banking book | 303 | 96 | 144 | 41 |
| Pension risk | 0 | 0 | 0 | 0 |
| Other Pillar 2 risks | 27 | 27 | 27 | 27 |
| Total own funds requirement – Pillar 2 | 563 | 357 | 459 | 335 |
| Capital buffers | ||||
| Capital conservation buffer | 868 | 841 | 747 | 700 |
| Countercyclical buffer | 0 | 0 | 0 | 0 |
| Total own funds requirement – Capital buffers | 868 | 841 | 747 | 700 |
| Total capital requirements | 4,204 | 3,889 | 3,596 | 3,274 |
Capital ratios and capital buffers
Regulation (EU) No 575/2013 of the European Parliament and the Council requires credit institutions to maintain Common Equity Tier 1 capital of at least 4.5 per cent, Tier 1 capital of at least 6 per cent and a total capital ratio (capital in relation to risk-weighted exposure amount) of 8 per cent. Credit institutions are also required to maintain specific capital buffers. Hoist Finance is currently required to maintain a capital conservation buffer of 2.5 per cent of the total risk-weighted exposure amount and an institutional specific countercyclical buffer of 0 per cent of the total risk-weighted exposure amount.
The table below shows CET1 capital, Tier 1 capital and the total capital ratio in relation to the total risk-weighted exposure amount for Hoist Finance consolidated situation and for the regulated entity Hoist Finance AB (publ). It also shows the total regulatory requirements under each pillar and the institution-specific CET1 capital requirements. All capital ratios exceed the minimum requirements and capital buffer requirements.
| Hoist Finance consolidated situation | Hoist Finance AB (publ) | |||
| Capital ratios and capital buffers, % | 31 Dec 2021 | 31 Dec 2020 | 31 Dec 2021 | 31 Dec 2020 |
| CET1 ratio | 9.56 | 10.76 | 11.71 | 13.09 |
| Tier 1 capital ratio | 12.74 | 14.05 | 15.41 | 17.04 |
| Total capital ratio | 15.16 | 16.49 | 18.21 | 19.97 |
| Institution-specific CET1 requirements | 7.00 | 7.00 | 7.00 | 7.00 |
| of which, capital conservation buffer requirement | 2.50 | 2.50 | 2.50 | 2.50 |
| of which, countercyclical buffer requirement | 0.00 | 0.00 | 0.00 | 0.00 |
| CET1 capital available to meet buffers (as a percentage of risk exposure amount)1) | 5.06 | 6.26 | 7.21 | 8.59 |
1) CET1 ratio as reported, less minimum requirement of 4.5 per cent (excluding buffer requirements) and less any CET1 items used to meet the Tier 1 and total capital requirements.
Internally assessed capital requirement
As per 31 December 2021, the internally assessed capital requirement for Hoist Finance was SEK 3,340m (3,048), of which SEK 563m (357) was attributable to Pillar 2.
| Hoist Finance Consolidated situation | Hoist Finance AB (Publ) | |||
| Leverage ratio | 31 Dec 2021 | 31 Dec 2020 | 31 Dec 2021 | 31 Dec 2020 |
| Exposure measure for leverage ratio calculation | 31,003 | 31,177 | 31,502 | 31,167 |
| Tier 1 capital | 4,423 | 4,723 | 4,604 | 4,768 |
| Leverage ratio, % | 14.27 | 15.15 | 14.62 | 15.30 |